UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2002

COMMISSION FILE NUMBER: 0-19797

WHOLE FOODS MARKET, INC.

(Exact name of registrant as specified in its charter)

601 North Lamar Blvd., Suite 300

Austin, Texas 78703

(Address of principal executive offices)

Registrant’s telephone number, including area code:

512-477-4455

Securities registered pursuant to section 12(g) of the Act:

Common Stock, no par value

Preferred Stock Purchase Rights

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx No¨

The aggregate market value of the voting stock held by non-affiliates of the registrant on November 29, 2002as of April 11, 2003 was $3,055,328,069.

The number of shares of the registrant’s common stock, no par value, outstanding as of November 29, 200230, 2003 was 58,075,886.

Index to Financial Statements

This Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 concerning our current expectations, assumptions, estimates and projections about the future. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to risks and uncertainties that could cause our actual results to differ materially from those indicated in the forward-looking statements. Please see “Item 1. Business—Business - Additional Factors That May Affect Future Results” for a discussion of risks and uncertainties that may affect our business.

PART I

Whole Foods Market, Inc. owns and operates the country’s largest chain of natural and organic foods supermarkets. Our Company mission is to improve the health,promote vitality and well-being and healing of both people and the planet. To achieve this mission, we plan to continue to expand our retail operations to offerfor all individuals by supplying the highest quality, most wholesome foods available. Since the purity of our food and most nutritiousthe health of our bodies are directly related to the purity and health of our environment, our core mission is devoted to the promotion of organically grown foods, to morefood safety concern and more customers, helping them live healthier and more vital lives.sustainability of our entire eco-system. Through our growth, we have had a large and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance over the last twenty-two23 years.

We opened our first store in Austin, Texas in 1980 and as of September 29, 2002,28, 2003, we operated 135145 stores in 2526 states plus the District of Columbia and Canada. Our sales have grown rapidly through new store openings, acquisitions and same store sales growth, from approximately $120$92 million in fiscal year 1992,1991, excluding the effect of pooling-of-interests transactions completed since 1992,1991, to approximately $2.7$3.1 billion in fiscal year 2002,2003, a compounded annual growth rate of approximately 36%34%. Our stores currently average approximately 31,000 square feet in size and approximately $21$22 million in annual sales. Our stores are supported by regional distribution centers, bakehouses,bakehouse facilities, commissary kitchens, a seafood processing facility, twoseafood-processing facilities, produce procurement and field inspection offices,centers and a coffee roasting operation.

Our goal is to become a national brand synonymous with not just natural and organic foods, but with being the best food retailer in every community in which we are located.

According to a leading trade publication for the industry, natural products sales grew to over $34$36 billion in 2001,2002, a 7% increase over the prior year. The natural and organic products we offer in our stores include foodsfood and beverages, dietary supplements, personal care products, household goods, and related educational products. SalesWe believe that sales growth for natural and organic foods is being driven by numerous factors, including:

Index to Financial Statements

The Organic Rule

On October 21, 2002, the United States Department of Agriculture’s (“USDA”) Organic Rule was implemented into Federal law. The rule was created to address the rapid, consistent growth of the organics industry over the past 20 years createdand the need for a set of national organic standards to serve as clear guidelines as to what is considered organic for the industry and its customers as to what can be considered organic. Many individuals and groups involved incustomers. Under the organic industry (including Whole Foods Market and some of our vendors) worked closely with congressional representatives to help shape what eventually, after 11 years of input and revision, became the United States Department of Agriculture’s (“USDA”) Organic Rule, implemented into Federal law on October 21, 2002.

Index to Financial Statements

In addition, Whole Foods Market has championed innovative production standards to improve the quality and safety of the meat and poultry sold in our stores, while also supporting the better treatment and health of the animals. Animal welfare requirements currently mandatory for any meat and poultry sold by the Company include:

In October 2003, we announced plans to create farm animal treatment standards that go above and beyond these existing strict standards. These new standards of production and processing are being developed in cooperation with producers, animal welfare groups and experts and an independent third-party food safety auditor. The next phase of our animal welfare standards underscores the Company’s belief that the needs of an animal should be the first criteria in the development of standards, with focus on providing environments and conditions for each species that support the animal’s natural physical needs, behavior and well-being. Products meeting the utmost standard will be labeled “animal compassionate.” Work on our new “animal compassionate” standards is planned to start with the development of enhanced animal welfare standards for ducks, with the development of standards for other species to follow.

Product Categories

Our product categories include, but are not limited to: produce, seafood, grocery, meat and poultry, bakery, prepared foods and catering, specialty (beer, wine and cheese), whole body (nutritional supplements, vitamins, body care and educational products such as books), floral, pet products and household products.

Perishable products, defined as food and other products subject to spoilage, accounted for approximately 65%66% of our total retail sales in fiscal year 2002.2003, up from approximately 57% of our total retail sales 10 years ago. We believe our heavy emphasis on perishable products differentiates us from conventional supermarkets and helps us to attract a broader customer base. We believe that all shoppers, not just natural and organic food shoppers, appreciate great produce, dairy, meat, seafood, bakery and prepared foods.

Because of the relative lack of national brands inwithin the natural products industry, ourwe believe we have a unique private label program has comparatively strong brand recognition.opportunity. We have taken advantage of this opportunity and over the last several years have expanded our private label offerings, which currently feature over 1,200 SKUs.1,300 SKUs and comprise three corporate brands (365 Everyday Value, Whole Kids Organic and 365 Organic), as well as the Authentic Food Artisan (AFA) program introduced in January 2003. In fiscal year 2002,addition to these nationally-driven programs, we beganhave a major expansionnumber of our private label program withstore-made and regionally-made fresh items sold under the introduction of our “365 Organic” line. At the close of fiscal year 2002, we offered approximately 30 different 365 Organic products, including organic canola oil, organic salad dressings, organic sodas, and organic apple juice. Our original “365” line of value-oriented products will continue to grow, as will our ”Whole Kids” line, which will be adding juices, cereals and other new products developed specifically for children. Our private label sales in grocery and nutrition currently account for approximately 14% of our total sales in those product categories.Whole Foods Market label. We also offer specialty and organic coffees and teas through our Allegro Coffee Company subsidiary.

We believe team members are inspired by work that provides them with a greater sense of purpose and mission. For many team members, their job with us is an extension of their personal philosophy and lifestyle. Many team members feelhave said they are contributing to the good of others by selling clean and nutritious foods, by contributing to long-term sustainable agriculture and by promoting a pesticide-free and healthier environment. WeSince 1993, we have offered a program that provides paid time off to team members for working with qualified community service organizations. As part of this program, our team members provided more than 57,500 hours of service to their communities paid for by the Company in fiscal year 2003. For the past fivesix years, Fortune magazine has selected us as one of the “100 Best Companies to Work for in America.”

Every year our team members have the opportunity to complete a Morale Survey. In 2003, the overall participation rate was 71%, the highest the Company has ever experienced. Topics covered in the survey include job satisfaction, opportunity and empowerment, pay, training and benefits. Of the team members responding, 86% said they almost always or frequently enjoy their job (up from 82% last year), and 81% said they almost always or frequently feel empowered to do their best work at Whole Foods Market (up from 80% last year).

Index to Financial Statements

We strive to create a Company-wide consciousness of “shared fate” by uniting the self-interests of team members as closely as possible to the self-interests of our shareholders. One way we reinforce this concept is through a gainsharing program rewarding a team’s labor productivity. We also encourage stock ownership among team members through the following programs:

We do not have a standard store design model. Instead, each store’s design is customized to fit the size and configuration of the particular location and community in which it is located. We have transformedstrive to transform food shopping from a chore into a dynamic experience by building and operating stores with colorful décor, well-trained team members, exciting product mixes, teams of in-store chefs, ever-changing selections, samples, open kitchens, scratch bakeries, hand-stacked produce, prepared foods stations and European-style charcuterie departments. To further a sense of community and interaction with customers, our stores typically include sit-down eating areas, customer comment boards and customer service booths. We have “Take Action” centers for our customers who want to be informed on important issues relative to environmental, legislative, food safety and product quality issues that can directly affect our customers’ health and well being.well-being. In addition, some stores offer special services such as massage, valet parking and home delivery. Whole Foods MarketWe believe our stores play a unique role as a third place, besides the home and office, where people can gather, interact and learn while at the same time discovering the many joys of eating and sharing food.

Most of our stores is generallyare located in a high-traffic shopping areaareas and isare either freestanding or in a strip center. We also have a small number of urban stores located in high-density, mixed-use projects. In selecting store locations, we use an internally developed model to analyze potential markets based on various criteria such as education levels, population density and income levels. Approximately 87%88% of our existing stores are located in the top fifty50 statistical metropolitan areas. We primarily seek to open large format stores, which range in size between 30,00035,000 to 50,00055,000 square feet and are located on premier real estate sites, often in urban, high populationhigh-population locales. After we have selected a target site, our site consultants dodevelopment group does a comprehensive site study and sales projection. Potential sitesEach project must passmeet an internal EVA hurdles. The 19hurdle return, which is generally cumulative positive EVA within five to seven years.

Approximately half of our stores currently under development average approximately 41,000 square feet.

Our buyers purchase products for retail sale from local, regional and national wholesale suppliers and vendors. Over the last few years, we have shifted the majority of our purchasing operations from the store to the regional and national level. By purchasing on a regional and national level, we are able to negotiate better volume discounts with major vendors and distributors, while allowing regional and store buyers to focus on local products and the unique product mix necessary to keep a neighborhood market feel in our stores. We own two produce procurement centers and procure and distribute the majority of our produce ourselves. Other products, like poultry, grocery and nutrition, are typically procured through a combination of specialty wholesalers and direct distributors. United Natural Foods is our single largest supplier, accounting for approximately 18% of our total purchases in fiscal year 2003.

Index to Financial Statements

We own and operate eight regional distribution centers across the country. The largest of our regional distribution centers, the Southwest Distribution Center in Austin, Texas, distributes a full range of natural products to our stores in Texas, Louisiana, Colorado, Kansas and New Mexico.

We spend less on advertising and marketing than conventional supermarkets – approximately 0.5% of our total sales in fiscal year 2003, instead relying primarily on word-of-mouth recommendations from our customers. We allocate our marketing budget among region-wide programs, our individual stores’ marketing efforts, and a national brand awareness initiative focusing primarily on national and major market public relations and consumer research. Our stores spend most of their marketing budgets on in-store marketing signs and other materials, store events such as taste fairs, classes, tours and product samplings. To create goodwill and maintaindevelop a high profile within the community, each store also has a separate budget for making contributions to a variety of philanthropic and community activities. We presently contribute at least 5% of our after-tax profits in the form of cash or products to not-for-profit organizations.

One of our core values as a Companycompany is to satisfy and delight our customers. We want to meet or exceed their expectations on every shopping trip. We knowbelieve that by doing so we turn customers into advocates for our business. Advocatesbusiness, who do more than shop with us,us; they talk about Whole Foods Market to their friends and others. We want to serve our customers competently, efficiently, knowledgeably and with flair. We believe that we generate greater appreciation and loyalty from our customers by educating them about natural and organic foods, health, nutrition and the environment through our in-store “Take Action” centers as well as on our corporate webWeb site at www.wholefoodsmarket.com, which features hundreds of recipes and a library of information about environmental, legislative, food safety and product quality issues.

As of September 29, 2002,28, 2003, we had approximately 24,10026,600 team members, including approximately 20,40022,500 full-time, 2,5002,600 part-time and 1,2001,500 temporary team members. We are proud that approximately 90% of our permanent team members are full-time team members, which we believe is very high for the food retailing industry. We sponsor a self-insured health care benefits planOne of our core values is team member happiness and excellence, and we are pleased that for participatingthe past six years, our team members.members have helped Whole Foods Market be selected as one of Fortune magazine’s “100 Best Companies to Work for in America.” In Texas, we reserve for job-related injury claims as they occur rather than subscribingscoring companies, Fortune places the greatest weight (two-thirds of the total) on responses to a workers’ compensation insurance program forrandom survey of employees, with the remainder being Fortune’s evaluation of each company’s benefits and practices. We are the only national food retailer to make the list, and we are one of only 25 companies to make the list every year since its inception. In fiscal year 2003, we conducted our first-ever, Company-wide benefits vote, which gave our team members.members an opportunity to vote on their benefits package for the next three years. We were pleased that close to 80% of all eligible full-time and part-time team members participated in the vote. All of our full-time and part-time team members are eligible to receive stock options. Our Madison, WI store is the Company’s only store represented

Unions may from time to time attempt to organize our team members or portions of our team member base at certain stores or non-retail facilities. In addition, our new and existing stores have been subjected to informational picketing and negative publicity campaigns from time to time by a labor union.members of various local trade unions. A vote to appoint the unionUnited Food and Commercial Workers (“UFCW”) as legal representative of thisour Madison, WI store was certified on September 7, 2002, and we are currently engaged2002. After engaging in collective bargaining negotiations.

We use EVAEconomic Value Added (“EVA”) to evaluate our business decisions and as a basis for determining incentive compensation. In its simplest definition, EVA is equivalent to net operating profits after taxes minus a charge for the cost of capital necessary to generate those profits. We believe that profit. Oneone of our core strengths is our decentralized culture, where decisions are made at the store level, close to the customer. ThisWe believe this is one of our strongest competitive advantages, and we believe that EVA is the best financial framework that team members can use to help make decisions that will create sustainable shareholder value.

Index to Financial Statements

We use EVA extensively for capital investment decisions, including evaluating new store real estate decisions and store remodeling proposals. We are turning down projects that do not add value to the Company in the short- or long-term. The EVA decision-making model is also enhancing operating decisions in stores. Our emphasis is on EVA improvement, as we want to challenge our teams to continue to innovate and grow EVA in new ways. We believe that opportunities always exist to increase sales and margins, to lower operating expenses and to make investments that add value in ways that benefit all of our stakeholders. We believe that focusing on EVA improvement encourages continuous improvement of our business.

Over 400500 leaders throughout the Company are now on EVA-based incentive compensation plans, of which the primary measure is EVA improvement. EVA-based plans cover our senior executive leadership, regional leadership and the store leadership team in all stores. Incentive compensation for each of these groups is determined based on relevant EVA measures at different levels, including the total company level, the regional level, the store or facility level, and the team level. We believe using EVA in a multi-dimensional approach best measures the results of decisions made at different levels of the Company. We expect to continue to expand the use of EVA as a significant component of our compensation structure throughout the Company in the coming years.

Information about our EVA financial results is not presented in consideration of recent rules adopted by the Securities and Exchange Commission regarding non-GAAP financial measures. Additional information basedabout our EVA financial results is available on a 10% weighted average cost of capitalour corporate Web site at www.wholefoodsmarket.com and a 40% tax rate for the fiscal years ended September 29, 2002, September 30, 2001 and September 24, 2000 (in thousands):

Food retailing is a large, intensely competitive industry. Our competitors includecompetition varies from region to region and includes local, regional and national conventional and specialty supermarkets, smaller specialty stores and restaurants.

Natural and organic foods are one of the fastest growing segments of food retailing today. Most supermarkets offer at least a limited selection of these products, while some have chosen to expand their selection more aggressively. We have foundbelieve it works to our benefit for conventional supermarkets to offer natural and organic products for two reasons. First,reasons: first, it helps fulfill our Companycompany mission of improving the health, well-being and healing of both people and the planet. Second,planet and second, it helps create new customers for us by creating a gateway experience. As more people are exposed to the benefits of natural and organic products, they are more likely to become Whole Foods Market customers asbecause we are the category leader for natural and organic products, offering what we believe is the largest selection and most informed customer service at competitive prices.

Our stores are subject to various federal, state and local laws, regulations and administrative practices affecting our business. We must comply with provisions regulating health and sanitation standards, food labeling, equal employment, minimum wages and licensing for the sale of food and, in some stores, alcoholic beverages.

The manufacturing, processing, formulating, packaging, labeling and advertising of products are subject to regulation by various federal agencies including the Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission (“CPSC”), the United States Department of Agriculture (“USDA”) and the Environmental Protection Agency (“EPA”). The composition and labeling of nutritional supplements are most actively regulated by the FDA under the provisions of the Federal Food, Drug and Cosmetic Act (“FFDC Act”). The FFDC Act has been revised in recent years with respect to dietary supplements by the Nutrition Labeling and Education Act and by the Dietary Supplement Health and Education Act. We believe we are in material compliance with product labeling requirements.

Margaret Wittenberg, our Vice President of GovernmentalMarketing and Public Affairs, has served on numerous government boards and industry committees to create and strengthen the USDA’s Organic Rule (implemented into Federal law on October 21, 2002) and to counsel the USDA and the EPA on pesticide tolerance levels, the use and labeling of GMO’sGMOs in the food chain, and preserving marine fisheries.

Trademarks owned by the Company or its subsidiaries include, but are not limited to: “Whole Foods Market,” “Whole Foods Market 365“365 Everyday Value,” “365 Organic Everyday Value,” “Allegro Coffee Company,” “Bread & Circus,” “Fresh Fields,” “Merchant of Vino,” “Wellspring,” “Harry’s Farmers Market,” “Whole Kids”Kids Organic” and “Whole Foods, Whole People, Whole Planet.” The Company or its subsidiaries also holds registrations or applications, and maintains common law trademark rights for stylized logos and brand names for products created by Allegro Coffee Company and many of its private label products.

We have included our webWeb site address only as an inactive textual reference. The information contained on our webWeb site is not incorporated by reference into this Form 10-K.

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications, as well as oral forward-looking statements made from time to time by representatives of ourthe Company. These risks and uncertainties include, but are not limited to, thosethe risks described below. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The cautionary statements below discuss important factors that could cause our business, financial condition, operating results and cash flows to be materially adversely affected.

Our strategy is to expand through a combination of new store openings and, to a lesser extent, acquisitions of existing stores. Successful implementation of this strategy is contingent on numerous conditions, some of which are described below, and there can be no assurance that our expansion strategy can be successfully executed.

Our continued growth depends to a significant degree on our ability to open or acquire new stores in existing and new markets and to operate these stores successfully. Our expansion strategy is dependent on finding suitable locations, and we face intense competition from other retailers for such sites. We may not be able to timely open new stores or operate them successfully. In addition, we may not be able to successfully hire and train new team members or integrate those team members into the programs and policies of ourthe Company. We may not be able to adapt our distribution, management information and other operating systems to adequately supply products to new stores at competitive prices so that we can operate the stores in a successful and profitable manner.

There can be no assurance that we will continue to grow through acquisitions. For the acquisitions that we do make, we may not be able to successfully integrate those businesses into our operations and support systems, or the operations of acquired businesses may be adversely affected by the introduction of our decentralized operational approach.

Our comparable store sales in the future could fluctuate or be lower than our historical average for many reasons including new and acquired stores entering into the comparable store base, the opening of new stores in existing markets which cannibalize existing store sales, increased competition, price changes in response to competitive factors, and possible supply shortages. In addition, we plan to change all of our store brands to Whole Foods Market which may temporarily have a negative impact on our sales. Results of operations may be materially impacted by fluctuations in our comparable store sales as it becomes more difficult to leverage expenses at a lower level of sales.

Our quarterly operating results could fluctuate for many reasons, including losses from new stores, variations in the mix of product sales, price changes in response to competitive factors, increases in store operating costs, possible supply shortages, extreme weather-related disruptions, and potential uninsured casualty losses or other losses. In addition, our quarterly operating results may fluctuate significantly as the result of the timing of new store openings, the timing of acquisitions, the range of operating results generated from newly opened stores and changes in estimates associated with the disposal of discontinued operations. Quarter to quarterQuarter-to-quarter comparisons of results of operations have been and may be materially impacted by the timing of new store openings.

The acquisition of existing stores, the opening of new stores, and the development of new production and distribution facilities require significant amounts of capital. In the past, our growth has been funded primarily through proceeds from public offerings, bank debt, private placements of debt and internally generated cash flow. These and other sources of capital may not be available to us in the future. In addition, restrictive covenants that may be imposed by our lenders may restrict our ability to fund our growth.

We continually evaluate and upgrade our management information systems. We have completed a number of acquisitions in recent years, and the information systems ofat some of the acquired operations have not been fully integrated with our information systems. Although we do not anticipate any disruption in our operations or financial reporting as a result of system upgrades or system integrations, there can be no assurance that such disruption will not occur or that the desired benefits from the system upgrades will be realized.

We rely on a combination of patent, trademark, trade secret and copyright law and internal procedures and nondisclosure agreements to protect our intellectual property. There can be no assurance that our intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. In addition, the laws of certain foreign countries in which our products may be produced or sold do not protect our intellectual property rights to the same extent as the laws of the United States. Failure to protect our proprietary information could have a material adverse effect on our business, results of operations and financial condition.

We provide self-insured, voluntary team member benefits plans that provide, among other benefits, health care benefits to participating team members. The plans are designed to provide specified levels of coverage, with excess insurance coverage provided by a commercial insurer. Costs of health care have risen significantly in recent years, and we expect this trend to continue. Although not currently anticipated by management, our results could be materially impacted by claims and other expenses related to such plans.

We have historically made investments in private and public companies for strategic purposes. We have investments oftotaling approximately $4.4$2.3 million in both common and preferred equity securities of Gaiam.com, a non-public Internet company, and a marketable equity investment in Gaiam, Inc., its parent company.a public company traded on the NASDAQ National Market under the symbol GAIA. Many factors outside of our control determine whether or not our investments will be successful. Such factors include market conditions and the investee’s ability of an investee to obtain additional financing or to achieve commercial success with its products or services. Accordingly, there can be no assurances that these investments will maintain their fair value or that we will be able to recover the carrying amount of these investments.

We are subject to periodic audits and examinations by the Internal Revenue Service (“IRS”) and other state and local taxing authorities. Although not currently anticipated by management, our results could be materially impacted by the determinations and expenses related to these and other proceedings by the IRS and other state and local taxing authorities.

A.C. Gallo has served as Executive Vice President of Operations since February 2001. Mr. Gallo has held various positions with the Company and with Bread & Circus, Inc., which was acquired by the Company in October 1992, including Vice President and President of the Northeast Region. His title was expanded in December of 2003 to include “Chief Operating Officer” in order to more clearly reflect the full scope of his responsibilities.

Walter Robb has served as Executive Vice President of Operations since February 2001. Since joining the Company in 1991, Mr. Robb has also served as Store Team Leader and President of the Northern Pacific Region. His title was expanded in December of 2003 to include “Chief Operating Officer” in order to more clearly reflect the full scope of his responsibilities.

James P. Sud has served as Executive Vice President of Growth and Business Development since February 2001. Mr. Sud joined the Company in May 1997 and served as Vice President and Chief Operating Officer until February 2001. Mr. Sud served as a director of the Company from 1980 to 1997.

Michael Besancon has served as President of the Southern Pacific Region since February 2001. Mr. Besancon has held various positions within the Company since 1995, including Purchasing Director, Vice President of the Southern Pacific Region and President of the Mid-Atlantic Region.

Anthony Gilmore has served as President of the Midwest Region since January 2002. Mr. Gilmore has held various positions with the Company since 1996, including Store Team Leader, Vice President and President of the Southwest Region.

David Lannon has served as President of the Northeast Region since March 2001. Mr. Lannon has held various positions with the Company and with Bread & Circus, Inc., which was acquired by the Company in October 1992, including Store Team Leader, Director of Store Operations and Vice President of the Northeast Region.

Ron Megahan has served as President of the Northern Pacific Region since June 2001. Mr. Megahan has held various positions with the Company since 1989 including Store Team Leader.

Kenneth Meyer has served as President of the South Region since March 2001. Mr. Meyer has held various positions with the Company since 1996, including Store Team Leader and Vice President of the Southwest Region.

Juan Nunez has served as President of the Florida Region since September 1998. Mr. Nunez has held various positions with the Company and with Mrs. Gooch’s Natural Food Markets, Inc., which was acquired by the Company in September 1993, including Store Team Leader, Director of Store Operations and Vice President of the Southwest Region.

William Paradise has served as President of the Southwest Region since January 2002. Mr. Paradise has held various positions with the Company since 1990, including Store Team Leader, Vice President of the Northern Pacific Region and Vice President of the Southwest Region.

Lee Valkenaar has served as President of the Mid-Atlantic Region since March 2001. Mr. Valkenaar has held various positions with the Company since 1987, including Store Team Leader, Vice President and President of the Southwest Region.

The Company has adopted a code of conduct and ethics for senior financial officers pursuant to section 406 of the Sarbanes-Oxley Act. A copy of our code of conduct and ethics is available free of charge by writing to Shareholder Services, Whole Foods Market, Inc., 601 N. Lamar Blvd., Suite 300, Austin, TX 78703.

At September 29, 2002,28, 2003, we operated 135145 stores in 2526 states, the District of Columbia and Canada. We own six store locations in New Orleans, Berkeley and Atlanta. We also own certain non-retail facilities in Atlanta and a building in Austin, Texas which houses one of our stores, the corporate headquarters and a bookstore. The underlying property in Austin is leased from a third party under a ground lease which has a remaining base term of approximately 1110 years plus ten10 options to renew for five years each. On November 20, 2001 we completed the sale of the facility in Thornton, Colorado that was associated with discontinued operations. On December 11, 2002, we completed the sale of an undeveloped property in Westminster, Colorado that was associated with discontinued operations. All other stores, distribution centers, bake housesbakehouses and administrative facilities are leased, with expiration dates ranging from one to 3827 years. We have options to renew most of our leases in five-year increments with renewal periods ranging from 5five to 50 years.

Index to Financial Statements

The following table shows the number of our stores by state, the District of Columbia and Canada as of September 29, 2002:

From time to time, the Company is involved in lawsuits that we consider to be in the normal course of business which have not resulted in any material losses to date.

Not applicable.

PART II

The Company’s common stock is traded on the NasdaqNASDAQ National Market under the symbol WFMI. The following sets forth the high and low sales prices of the Company’s common stock for the last two fiscal years:

The Company had 1,3311,376 record holders of its common stock as of November 29, 2002.

On June 4, 2001 the Company effected a 2-for-1 stock split of the Company’s common stock in the form of a 100% stock dividend. All applicable amounts have been restated to reflect the stock split.

The Company intends to retain any earnings for use inannounced its business and therefore does not anticipate paying anyfirst quarterly dividend on November 12, 2003. A cash dividend of 15 cents per share is payable January 16, 2004 to shareholders of record as of January 6, 2004. The Company will pay future dividends at the discretion of the Board of Directors. The continuation of these payments, the amount of such dividends, and the form in which the foreseeable future.dividends are paid (cash or stock) depend on many factors, including the results of operations and the financial condition of the Company. The Company’s present bank credit agreement contains certain restrictive covenants that include the prohibition ofwas amended on November 12, 2003 to allow for the payment of dividends on common stock.

(in thousands, except per share and operating data)

(in thousands, except per share and operating data)

Whole Foods Market opened its first store in Texas in 1980 and has expanded its operations to 135145 stores as of September 29, 200228, 2003 both by opening new stores and acquiring existing stores from third parties. We operate in one reportable segment, natural and organic foods supermarkets. We currently have one store in Toronto, Ontario, Canada. All of our remaining operations are domestic. Our results of operations have been and may continue to be materially affected by the timing and number of new store openings. New stores generally become profitable during their first year of operation, although some new stores may incur operating losses for the first one to three years of operations. Our results of operations are reported on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 20022003 and 20002002 are 52-week years and fiscal year 2001 is a 53-week year.

In November 2000, the Company adopted a plan to dispose of the NatureSmart business of manufacturing and direct marketing of nutritional supplements. Accordingly, theThe NatureSmart business and related net assets have beenwere recorded as discontinued operations in the consolidated financial statements, forand as of September 28, 2003, substantially all years presented.activities associated with discontinued operations have been completed. The following discussion and analysis refer only to continuing operations.

The following table sets forth the statements of operations data of Whole Foods Market expressed as a percentage of total sales for the fiscal years indicated:

Sales from continuing operations increased 20.7%17.0%, 23.6%18.4% and 23.2%23.6% in fiscal years 2003, 2002 and 2001, and 2000, respectively, adjusted to reflect a fifty-two week period in fiscal year 2001.respectively. Sales for all years shown reflect increases due to new stores opened and acquired and comparable store sales increases of approximately 10.0%8.6%, 9.2%10.0% and 8.6%9.2% in fiscal years 2003, 2002 2001 and 2000,2001, respectively. Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Identical store sales, which excludes remodels with expansions of square footage greater than 20% and relocations, increased approximately 8.1%, 8.7%, 8.0% and 7.0%8.0% in fiscal years 2003, 2002 and 2001, respectively. Sales from relocations and 2000, respectively. Comparableremodels with expansions of square footage greater than 20% are excluded from identical store sales data to reduce the impact of square footage growth on the comparison. Our comparable and identical store sales increases generally resulted from an increase in the number of customer transactions and slightly higher average transaction amounts, reflecting an increase in market share as the stores mature in a particular market. These increases are due to such factors as customers increasing their amount of purchases with us over time, improvements in overall store execution, stronger brand awareness and increased sales of perishables and private label products.

Gross profit consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and food preparation operations. Our gross profit from continuing operations as a percentage of sales was 34.3%, 34.7%, 34.8% and 34.5%34.8% in fiscal years 2003, 2002 2001 and 2000,2001, respectively. Gross profit margin in fiscal year 2003 reflects higher occupancy costs, including utilities, repairs, and rent, higher LIFO charges compared to the prior year, and market-driven pricing strategies. Gross profit margins in fiscal years 2002 wasand 2001 were negatively impacted by lower margins at the Harry’s Farmers Market stores whichthat were acquired in October 2001. In all years, gross profit margins were positively affected by increased national buying, category management and private label initiatives, which lower the cost of product purchased on a national basis. Additionally, continued improvement by new stores with respect to product procurement, merchandising and controlling shrink has positively affected gross profit. In all years, gross profit margins were also positively affected by margin improvements as stores mature. Relative to other stores in a region, gross profit margins tend to be lower for new stores and increase as stores mature, reflecting lower shrink as volumes increase, as well as increasing experience levels and operational efficiencies of the store teams. Gross profit margins were positively affected in all years by the increased percentage of sales in certain regions and in certain departments such as prepared foods where we achieve higher gross profits.

Direct store expenses from continuing operations as a percentage of sales was approximately 25.1%25.2%, 25.3%25.1% and 25.0%25.3% in fiscal years 2003, 2002 and 2001, and 2000, respectively. We continue to focus on leveraging of labor and other direct expenses to drive improvement in store contribution. For all years, higher direct operating expenses of new stores continue to have a partially offsetting impact on store contribution. Significant increasesDirect store expense as a percentage of sales tends to be higher for new stores and decrease as stores mature, reflecting increasing operational productivity of the store teams. We continue to focus on improvements in leveraging of labor, managing health care benefits plan costs and other direct expenses to produce incremental improvements in fiscal year 2002 resulted in increased costs for our self-funded health insurance plans. We have taken active steps to reform our benefit plans for fiscal year 2003 to better manage our health insurance costs in the future.

General and administrative expenses from continuing operations as a percentage of sales were 3.6%3.2%, 3.8%3.6% and 3.4%3.7% in fiscal years 2003, 2002 and 2001, respectively. Fiscal year 2003 general and 2000, respectively.administrative expenses decreased as a percentage of sales due to a strong focus on leveraging general and administrative expenses at both regional and national levels. Fiscal year 2002 general and administrative expenses reflect lower amortization expense related to the adoption of SFAS No. 142 and the expiration of certain assets related to non-competition agreements, which were partially offset by the increased costs of infrastructure for the new South region and increases in other regions and the national office. For fiscal year 2001, general and administrative expenses reflect increases in wage costs and depreciation from investments in information systems.

Pre-opening costs include costs associated with hiring and training personnel, supplies and certain occupancy and miscellaneous costs related to new store and facility openings. Pre-opening costs are incurred primarily in the thirty30 days prior to a new store or facility opening. Relocation costs consist of moving costs, remaining lease payments, accelerated depreciation costs and other costs associated with replaced facilities. We adopted AICPA Statement of Position (“SOP”) 98-5 “Reporting on the Costs of Start-up Activities” effective the beginning of the first quarter of fiscal year 2000. In accordance with SOP 98-5, in the first quarter of fiscal year 2000 we reported the cumulative effect of a change in accounting principle, a one-time charge totaling approximately $375,000 after taxes, representing start-up costs capitalized at September 26, 1999. We developed and opened eleven12 stores, one bakehousedistribution center and one commissary kitchen in fiscal year 2003, 11 stores, one distribution center and one bakehouse in fiscal year 2002, twelveand 12 stores in fiscal year 2001 and seventeen stores in fiscal year 2000.2001. Of these, two stores were relocations in botheach of fiscal years 2003, 2002 and 2001, and three stores were relocations in fiscal year 2000.2001. Pre-opening and relocation costs were approximately $12.1 million, $12.5 million $8.5 million and $10.5$8.5 million in fiscal years 2003, 2002 and 2001, and 2000, respectively.

During the fourth quarter of fiscal year 2001, we recognized store closure costs totaling approximately $9.4 million related to the decision to close three locations, all of which were previously acquired in multi-store transactions. Store closure costs include writedowns of leasehold improvements and store equipment to estimated fair values totaling approximately $5.6 million and estimated lease termination costs and other disposal costs totaling approximately $3.8 million. Substantially all activities other than lease termination related to these store closures were completed in fiscal year 2002. At September 29, 2002,28, 2003, the terminations of operating leases for two of the three closed locations remain to be completed.

Interest expense consists of costs related to our convertible subordinated debentures, senior notes and bank line of credit, net of capitalized interest associated with new store development and internally developed software. Interest expense, net of amounts capitalized, was approximately $8.1 million, $10.4 million $17.9 million and $15.1$17.9 million in fiscal years 2003, 2002 and 2001, and 2000, respectively. NetThese reductions in net interest expense for fiscal year 2002 reflects lower average amounts outstandingreflect decreased utilization of our bank line of credit and lower average interest rates on our $220 million bank line of credit. As of September 29, 2002,over the three-year period. We had no amounts were drawn on our bank line of credit. Net interest expense for fiscal years 2001 and 2000 reflects additional amounts outstanding on our bank line of credit. Approximately $90.0 million and approximately $137.0 million was drawn on our bank line of credit at September 30, 2001 and September 24, 2000, respectively.

Investment and other income (loss) for fiscal years 2002, 2001includes investment gains and 2000 includeslosses, interest income, rental income and other income totaling approximately $5.6 million, $2.1 million and $1.6 million in fiscal years 2003, 2002 and $2.0 million,2001, respectively. During fiscal year 2000, we determined that our preferred stock investment in American WholeHealth, Inc. had suffered a decline in value that was other than temporary. As a result,2003, we recognized a $10pre-tax gain of approximately $3 million pre-tax loss inas a result of the distribution of our ownership share of gain from the sale of Blooming Prairie Cooperative. During the first quarter of fiscal year 2000 associated with2003, our equity interest in Gaiam.com was converted into $1.0 million in cash and 250,000 restricted shares of Gaiam, Inc. common stock pursuant to the writeoffmerger of a subsidiary of Gaiam, Inc. into Gaiam.com. Subsequent to this investment.

Our effective tax rate on income from continuing operations was approximately 40.0% for fiscal years 2003, 2002 and 2001 and approximately 44.6% for fiscal year 2000. Our effective tax rate for fiscal year 2000 reflects the capital loss associated with the writeoff of our $10 million investment in American WholeHealth, Inc. and a corresponding valuation allowance that was established on the related deferred tax asset. Excluding the impact of this investment loss, our effective rate on income from continuing operations for fiscal year 2000 was approximately 39.5%.2001. At September 29, 2002,28, 2003, we had net operating loss carryforwards totaling approximately $46 million whichthat will expire in 2020. We consider it more likely than not that all net operating loss carryforwards will be utilized.

Equity in losses of unconsolidated affiliates for fiscal year 2001 totaled approximately $5.6 million and consisted primarily of the writedown of our investment in Gaiam.com to its estimated fair value and our share of Gaiam.com losses. During fiscal year 2001, we determined that our investment in Gaiam.com had suffered a decline in value that was other than temporary due to lower market valuations of Internet-related companies. As a result, we recognized a loss of approximately $5.5 million to reduce our investment in Gaiam.com to its estimated fair value in fiscal year 2001. No change in the carrying amount of our investment or share of Gaiam.com losses was required to be recognized in fiscal year 2002. Equity in losses of unconsolidated affiliates forDuring fiscal year 2000 totaled approximately $14.12003, our equity interest in Gaiam.com was converted into $1.0 million in cash and consisted primarily250,000 restricted shares of our share of WholePeople.com Internet operations losses, including WholePeople.com’s investment losses on Internet-related preferred andGaiam, Inc. common stock investments totaling approximately $12.4 million.

In November 2000, the Company adopted a formal plan to sell the NatureSmart business of manufacturing and direct marketing of nutritional supplements. Accordingly, the NatureSmart business has been accounted for and presented as discontinued operations in the consolidated financial statements. In fiscal year 2000, we recorded a loss on disposition of the NatureSmart business totaling approximately $24 million, representing the writedown to estimated net realizable value of the business being discontinued, costs associated with the planned disposal, and estimated loss from operations of the discontinued business through the expected date of disposition, net of income taxes. In May 2001, we completed the sale of all of our interest in NatureSmart for approximately $28 million in cash. In November 2001, we completed the sale of the facility in Thornton, Colorado that was used by NatureSmart for approximately $15 million in cash. The gain on disposal of approximately $16.2 million in fiscal year 2001 consists primarily of proceeds from thesethe sales of the NatureSmart business and facilities in excess of the amounts previously estimated and a reduction in the estimated future liabilities of the discontinued operations, net of taxes. Net loss fromAt September 28, 2003, substantially all activities associated with discontinued operations in fiscal year 2000 was approximately $9.4 million.

On October 31, 2001, we completed the acquisition of certain assets of Harry’s Farmers Markets, Inc., in exchange for approximately $36 million in cash plus the assumption of certain liabilities. The assets acquired are all assets relating to the three perishables superstores in Atlanta, Georgia, including but not limited to real estate, the Harry’s Farmers Market trade name, distribution center and other support and office facilities. This transaction was accounted for using the purchase method. Accordingly, the purchase price has been allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $8.7 million have been recorded as goodwill. Results of these acquired operations are included in our consolidated income statements for fiscal year 2003 and for the period beginning October 31, 2001 through September 29, 2002.